In a matter of hours, e-commerce turned blockchain company Overstock.com Inc (NASDAQ:OSTK) shed more than 13% of its value as investors started to panic about a Securities and Exchange Commission investigation into the firm’s cryptocurrency exchange, tZero. Little is known about the probe so far, but OSTK stock is paying a heavy price, which I’d argue is just the beginning if regulators start digging deeper into OSTK’s cryptocurrency bets.
The Wall Street Journal reported that the SEC issued subpoenas and requests for information to a wide swath of tech firms dealing in cryptocurrencies, with Overstock being one of them. The firm’s tZero exchange is in the midst of an Initial Coin Offering (ICO) worth $250 million, which is likely to be the subject of the SEC’s request.
While Overstock has confirmed that tZero will be reviewed by the SEC, management also claims that it has no knowledge of any legal issues with its coin exchange and is complying with the request.
Bad News for OSTK stock
The reason this has hit OSTK stock so hard is that the firm’s triple-digit gains over the past year have largely been attributed to the company’s cryptocurrency bets. However, this setback could derail CEO Patrick Byrne’s lofty goals to transform the company into a blockchain-focused business.
Just a few months ago, Byrne came out to say he was considering several options, all of which involved transforming Overstock into a cryptocurrency firm by effectively selling off the retail side of the firm’s operations. Although investors cheered Overstock’s move into the up-and-coming cryptocurrency space, it appeared that some started to worry about the risks involved.
Over the past two months OSTK stock lost about 30% of its value as some of Byrne’s comments painted his plans for the company’s future as outlandish, improbable and highly risky.
The Trouble With Cryptocurrency
Last year, Overstock got caught in a perfect storm of enthusiasm for cryptocurrencies and market optimism, which led the company to report triple-digit gains. However, although cryptocurrencies and especially blockchain have a lot of potential, the technology is still in its infancy and faces quite a few headwinds that are likely to create a lot of volatility over the next few years.
As it stands, cryptocurrencies are unregulated, which is also part of their charm. But as they make their way further into mainstream transactions, regulation is a foregone conclusion — something that could take away their appeal all together.
SEC Crackdown
While having your business involved in an SEC probe is never good, it doesn’t always have to spell disaster and it’s clear that Overstock is hoping for that kind of outcome. However, remarks from former SEC commissioner Dan Gallagher suggest that won’t be the case.
Gallagher’s rhetoric that coin offerings are “the freaking Wild West” and that “there is going to be a ton of enforcement activity” suggest that the SEC is planning to dig deep on this one.
As ICOs allow startups to fund their business in an unregulated environment, many investors found their money tied up in fraudulent schemes that were often run outside the U.S. and had no way of recovering their losses.
What Does It Mean for OSTK?
It’s hard to say what this probe will ultimately mean for OSTK stock considering there is very little information confirming exactly what tZero is being investigated for. However, the drop we’ve seen in Overstock’s share price is likely to continue to widen as more details emerge. The SEC looks set on cracking down on ICOs, and while Overstock may not be aware of any wrongdoing, it’s unlikely to pass through the agency’s fine tooth comb completely unscathed.
The bottom line? The SEC probe doesn’t necessarily mean Overstock’s cryptocurrency ambitions are over, but it’s likely to be quite awhile before the firm returns to investors’ good graces. In the mean time, I’d back away until more details emerge and there’s a better picture of what exactly the SEC is hoping to accomplish before considering OSTK stock a buy. If the probe turns out to be nothing more than a blip on the radar, this could become a buying opportunity, but unfortunately the situation looks very shaky.
As of this writing Laura Hoy did not hold a position in any of the aforementioned securities.
